Introduction

Mergers and acquisitions (MA) are seen as a key factor to growth in business. It seeks to acquire companies that offer the same products, goods, or services. One more process is used. The MA is done by purchasing a divestiture of a unit or division from the selling company is acquired.

This process is called carve out. It is a partial divestiture of a business unit, subsidiary, or division. It is a complex strategy where the parent company retains equity and shares in the profits of the divested unit.

Reasons for a carve out

There are several reasons why a carve out process looks beneficial. Some key reasons are:

• It allows capitalizing from divestment. The division or unit being divested is not part of its core business and not making as much money as projected. Carve out gives an option to retain equity and continue to earn profits.
• It allows for the new company to gain stability before being fully exposed to aggressive business environments.
• It allows for the creation of a new set of shareholders in the subsidiary as shares may be sold to the public.

Types of carve out

1. Equity Carve Out

In an Equity Carve Out, there is a sale of equity. Ownership shares in the subsidiary or division being divested are sold. 

2. Spin-off

A Spin-off is when the divested unit or division becomes an independent business unit. Shares in the unit are not sold to the buyer. The new unit will have its shareholders and management. However, the parent company may still retain some shares in the divested company.